Algeria: Selected Issues

February2023 ALGERIA SELECTEDISSUES IMFCountryReportNo.23/69 ThisSelectedIssuespaperonAlgeriawaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonJanuary12,2023. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2023InternationalMonetaryFund January12,2023 ALGERIA SELECTEDISSUES PreparedbyFabienGonguet(FAD),MahmoudHarb(MCD)andPriscillaMuthoora(MCD)asbackgrounddocumentationfortheperiodicconsultationwithAlgeria.ItisbasedontheinformationavailableatthetimeitwascompletedonNovember21,2022. ApprovedBy MiddleEastandCentralAsiaDepartment CONTENTS DESIGNINGARULES-BASEDFISCALFRAMEWORKFORALGERIA3 A.Introduction3 B.TheCaseforaRules-BasedFiscalFrameworkinAlgeria5 C.DesigningandCalibratingaRules-BasedFiscalFrameworkinAlgeria8 D.EnsuringEffectivenessoftheRules-BasedFiscalFramework21 E.Conclusion25 BOXES 1.DefinitionsofConceptsUsedintheDesignandCalibrationoftheRules-BasedFiscalFrameworkforAlgeria13 2.AValue-at-RiskModeltoCalibrateAlgeria’sSavingsBuffer17 3.AFewExamplesofEscapeClauses23 4.ExampleofCorrectionMechanism:Slovakia23 FIGURES 1.OilPricesandPublicFinance6 2.NumberofEmergingEconomiesHavingAdoptedatLeastaFiscalRule7 3.NumberofResource-RichEmergingEconomiesHavingAdoptedVariousCombinationsofFiscalRules7 4.ADual-PillarApproachforaRules-BasedFiscalFrameworkinAlgeria9 5.SequencingFortheCalibrationoftheProposedRules-BasedFiscalFrameworkinAlgeria10 6.BudgetReferenceOilPricesandtheFRRBalance14 7.SimulatedOilPriceTrajectoriesandFiscalHydrocarbonRevenue16 8.AssetsUnderManagementinSovereignWealthFunds19 9.ProposedBalancedCalibrationoftheRules-BasedFiscalFramework19 10.ProposedFiscalPathsintheTransitionPeriod21 ALGERIA TABLES 1.MinimumRequiredSizefortheAssetBuffer(DZDbnandPercentofGDP)18 2.MinimumRequiredSizefortheAssetBuffer(RelativetoBudgetHydrocarbonRevenue)18 3.ExamplesofPossibleCalibrationsoftheGrossDebtAnchorandSavingsFloor20 APPENDIX I.SensitivityoftheCalibrationtoModelAssumptions26References27 AREEXAMINATIONOFINFLATIONDYNAMICSANDDRIVERSINALGERIA29 A.Introduction29 B.InflationDynamicsinAlgeria:StylizedFacts31 C.DriversofInflation:DemandandSupplyFactors37 D.ConclusionandPolicyImplications43 FIGURES 1.Headline,CoreandFoodInflation29 2.ConsumerPriceInflation32 3.ARangeofExternalandDomesticCost-PushFactors33 4.OutputGap345a.DistributionofInflationComponents355a.SkewnessofInflationDistributionandAverageInflation35 6.ADecompositionofMonthlyInflationintoThreeUnobservedComponents37 TABLES 1.ADRLRegressionResultsforaBasicPhillipsCurveSpecification42 2.ADRLRegressionResultsforaTriangularPhillipsCurveSpecification42 APPENDIX I.StatisticalAppendix44References46 2INTERNATIONALMONETARYFUND DESIGNINGARULES-BASEDFISCALFRAMEWORKFORALGERIA1 A.Introduction 1.Algeria’sgovernmenthassetanumberoffiscalreformprioritiesandaimstomaintainprudentandsustainablepolicies.The2021GovernmentActionPlan(“Pland’ActionduGouvernement”,PAG)setsanambitiouspolicyagendaforfiscalreformsaimingat“respondingtotheimperativesofpreservingfinancialbalanceswhilemaintainingthesocialroleofpublicpolicies”.Italsoidentifiesstrategicgoalsforfiscalpolicy,includingpromotingeconomicdiversification,enhancingjobcreation,andreinforcinghumancapital. 2.Yet,thefiscalpolicystanceandlimitedfiscalbuffersareraisingAlgeria’svulnerabilitiesandposeriskstomacroeconomicstability.Atthecurrentjuncture,publicfinancesarebenefitingfromastrongboostfromhighhydrocarbonprices.Still,fiscalbuffersarethin,leavingpublicfinanceshighlyvulnerabletohydrocarbonmarketvagariesamidahighlyuncertainglobalbackdrop.Existingmechanismsmeanttosmoothoilrevenueandaccumulatesavingshavebecomemuchlesseffectiveinrecentyears.Meanwhilegovernmentdebthasrisenrapidlyandconsiderablyand,afteratemporarydeclinein2022-23,isprojectedtoresumeitsascensioninthemediumterm,constrainingfiscalspace.Incaseofrenewedhydrocarbonpriceshocks,thegovernmentislikelytofacearduoustradeoffsbetweenitssetpolicyprioritiesinordertopreservefiscalsustainability. 3.Thispaperdiscussesthedesignofarules-basedfiscalframeworkwhichcouldhelprebuildbuffersandsupportthegovernment’spolicyagenda.Theproposedcalibration,whichreliesontwoseparatepillars—agrossdebtpillarandasavingspillar—iswell-suitedtoAlgeriaandtoitslong-termobjectives.Thepaperfindsthatbuildingafiscalbufferofabout40percentofGDP,viathecombinationofasavingsfloorandasafegrossdebttarget(ordebtanchor),couldpreservemedium-termfiscalsustainabilityandinsurepublicfinancesagainsthydrocarbonpriceshocks.ThesavingsflooriscalibratedbasedonastochasticapproachsoastoprotectAlgerianpublicfinancesagainsthydrocarbonpriceshocks.Thedebtanchor,ormedium-termgrossdebttarget,iscalibratedsoastopreventdebtfromreachingpotentiallyunsustainableterritoryunderawiderangeof macro-fiscalscenar